my gut tells me STX is not far behind on this issue - Blount/WDC Delays Filing due to Option Grants
Investment Conclusion
In a recent filing, WDC stated it will delay its 10K
filing due to an internal investigation related to
historical stock option grants from 1999-2003.
Though no other color was provided by mgmt,
WDC must file its 10K within 15 days or request
for another extension from the SEC, and as a
result, will have to give investors an update during
that time. WDC has formed a special committee
to review its option granting, but did not elaborate
on its findings. Reiterate 2-EW rating and $22
price target.
Summary The current internal investigation is not new, and
was mentioned during WDC's last earnings call. WDC must update its 10K filing within 15 days or
request for another extension. Restated results will not impact FY05 and FY 06
results, but mgmt expects prior results to be
impacted. Maintaining current estimates and will review post
restatement of prior results.
Maintain Sept qtr rev/EPS est. of $1.17B/$0.39.
In a recent filing, WDC has notified the SEC that it will be delaying its 2006 10K filing due to an internal investigation regarding
option grants made from FY 1999 - FY 2003. WDC has convened a special committee of its board of directors to conduct a
review, and is still in progress. Option grants made between FY 1999 to FY 2003 will be the focus because measurement
dates for accounting purposes may differ from recorded dates used for certain grants made
• WDC has initiated an internal investigation related to historical stock option grants from FY 1999-FY 2003.
• It does not expect a material impact on FY 2005 or FY 2006.
• It may have a material impact on prior periods which may have to be restated.
Company Initiated Internal Stock Option Investigation
During its last earnings call, WDC stated that it would be conducting an internal stock option investigation (initiated by
Western Digital) by the Special Board Committee FY99-FY03 and that the investigation related to measurement dates for
accounting purposes which may not match the recorded dates. Depending upon the outcome of the investigation, Western
Digital may have to restate some historical results – though we note that management does not expect a material change to
FY05 and FY06 results and management noted that they have signed off on the results. The option investigation may
negatively impact the stock and overhang the stock until it is resolved.
Historical Option Grants
Our previous analysis indicates that Western Digital’s stock option grants do not appear to have been affected by backdating
though WDC did issue low-price option grants to management teams at certain wholly-owned subsidiaries. However,
according to management, these options turned out to have no value when the subsidiary business did not take-off or
succeed. Therefore, we have excluded options issued in subsidiaries from our analysis in the table shown below. But relating
to its internal investigation, several grants did have option exercise prices within 10% of the fiscal year low in FY99, FY00, and
FY02.
Figure 1: WDC Historical Stock Option Grant Dates: Option Exercise Price vs. Fiscal Year Low and High Price
Valuation. Our price target of $22 utilizes a 11.2x P/E multiple (0.8x relative P/E to the S&P 500 2007E P/E of 14.0x) and
our calendar 2007 estimate of $1.97.
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